What changes should be made to the EMI legislation to allow more companies to take advantage of this attractive form of management incentive?

June 2, 2021

In March this year HM Treasury issued a Call for Evidence on the effectiveness of Enterprise Management Incentives (EMIs) in fulfilling the Government’s policy objectives of helping Small and Medium Enterprises (SMEs) recruit and retain employees.

The Government’s objective for this call for evidence was to gather more evidence to understand whether the EMI scheme should be extended to include more companies. In particular, the Government sought views on whether:

  • the current scheme is fulfilling its policy objectives of helping Small and Medium Enterprises (SMEs) recruit and retain employees
  • companies that are ineligible for the EMI scheme because they have grown beyond the current qualification limits are experiencing structural difficulties (i.e. in the labour market) when recruiting and retaining employees
  • the government should expand the EMI scheme to support [larger] high growth companies and if so, how.

On 26th May, the British Venture Capital Association (the “BVCA”) responded to the Treasury’s call for evidence on EMIs.

Interestingly, HMRC’s evaluation report, published in 2018, concluded that EMIs are only being used by a small number of the high risk, high growth, small companies that the regime was specifically designed for. This conclusion was, to say the least, surprising because the EMI legislation is so attractive both to employers and employees in terms of both its flexibility and its tax effectiveness in supporting businesses wishing to incentivise staff by offering them share based awards.

The BVCA in its response points out that while the EMI regime’s benefits would be very attractive to PE/VC backed companies as approximately 80% of companies invested in by BVCA members each year are SMEs, the EMI regime is currently unavailable to companies that are backed by PE/VC because of the way the independence requirement interacts with the control aggregation rules applicable to the partnership structures that are commonly used by PE/VC funds.

As the BVCA says, this is unfortunate as the EMI rules were supposed to be designed specifically to benefit high risk, high growth, small companies, and this describes many PE/VC-backed companies perfectly. The BVCA’s recommendation (and it would be ours to) is to amend the legislation so that EMI options can be used by more of the companies the regime was originally targeted at, i.e. by amending the independence requirement to allow companies which are wholly owned or majority owned by a PE/VC fund limited partnership to qualify for EMIs.

Another comment of note that was made by the BVCA which again we would agree with is that the legislation should expand the definition of eligible companies to include companies with larger gross assets and larger numbers of employees.  Too many successful companies are forced to stop awarding EMIs earlier than they would wish just because they have grown so quickly.

The Call for Evidence also asked if any other forms of remuneration (i.e. CSOPS maybe) could help to attract and retain key talent after companies ceased to qualify for EMI.

The answer is not really.  Under the current structure of CSOPs, these would not be seen as a good substitute for EMIs in such situations.  However, if the CSOP legislation was amended, for example by increasing the £30,000 limit and by removing the three-year holding period, then perhaps they would offer a useful alternative to EMI.

We fully support all the comments made by the BVCA and hope that the Treasury will listen and act upon the BVCA’s suggestions.

In summary the EMI legislation should be amended:

(i)  to allow more PE and VC backed companies to grant EMI options to their staff;

(ii) to increase the £30m gross assets limit (to say £50m) and the number of employees to say 500;

And the CSOP legislation should be amended to allow greater flexibility in terms of option structures and to increase the £30,000 limit.

Here is hoping that the Government will listen to what the BVCA is saying.

For further information contact Nigel Mills.

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